Is it only size that matters?

It pays to bear in mind the saying:

  • Turnover is vanity
  • Profit is sanity
  • Cash is king!


About vfdnet

vfdnet provides Finance Directors and Management Accountants to small and medium sized businesses on a part time and affordable basis enabling business owners to focus on Business Growth.  For the right businesses our FDs and MAs will work on fixed fee and also part success fee basis.  Email or phone me on 01865 78 40 60.

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Dear James,

Welcome to the May issue of Game Plans for Growth, the regular newsletter for Owner and Managers.  This month we focus on acquisitions, looking at some of the reasons why you should consider buying another business as well as the advantages resulting from increased size.

We hope that you find this newsletter useful.  Please forward this newsletter on to other Owner Managers who may also find it helpful.

Kind Regards

James

 

The Idea

Increasing the size of your business can be a significant factor in improving how others will value it.  Businesses which are marginally profitable will be sold on a low multiple of profit, whereas medium sized AIM listed Plc businesses will be typically valued on at least 10 times profit.  Why should this be?

Many acquisitive companies equate size of business, as measured by turnover and profit, with the ability to sustain profitable trading.  Clearly many other factors have a major bearing on achieving sustainable competitive advantage, including the quality of the management team, the core competence of the business and the barriers to entry such as intellectual property.  However the size, and projected growth, of a business is usually the start point for a valuation.

The Game Plan

Acquisitions can help significantly accelerate your business growth.  So what are the main benefits you could gain from increased size?

1.    The ability to credibly pitch for bigger contracts

2.    Easier to recruit top level senior managers

3.    Growth stories attract attention eg. press interest

4.    Easier to sustain marketing campaigns through bigger marketing budgets

5.    More attractive to banks - much more likely to achieve bank funding secured on the forward cashflow of your business 

6.    Other fund providers such as business angels and venture capital funds become more interested

7.    Economies of scale with central services being spread over increasing turnover, so costing less in percentage terms.

8.    Adequate scale to be able to invest in employee packages, offering benefits such as healthcare, pension, incentive plans and even share options.

9.    Better negotiating position with key suppliers - normally realised through supplier reviews

10.  More attractive to strategic partners who may wish to partner when trialling new developments or products

11.  An acquisition may well bring new products or services which can be cross sold into your customer base (synergy benefits)

It is the final benefit associated with acquisitions which can bring the biggest benefits.  However with over 50% of acquisitions failing to achieve their objectives, this is not risk free and benefits from careful planning and project management (see our earlier newsletter on How do you Buy a Business?).

The End Result

So what is the 'dream deal'?  As a seller you might consider the maximum value realised on the deal, whereas a buyer will seek his ideal acquisition at the lowest price.  The best deal is where both buyer and seller win, when the seller achieves his objectives and the buyer gets a good deal.

The fun part is bringing the two sides together and being creative with solutions to 'problems' which may arise during the sale and purchase process.